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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________________ to _______________
Commission file number 0-16276
STERLING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2449551
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 North Point Boulevard
Lancaster, Pennsylvania 17601-4133
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 581-6030
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $5.00 Per Share
(Title of class)
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at February 29, 1996 was approximately $117,317,903.
The number of shares of Registrant's Common Stock outstanding on February 29,
1996 was 5,938,110.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 1996 Annual Meeting
of Shareholders are incorporated by reference into Part III of this report.
Sterling Financial Corporation
Table of Contents
Page
Part I
Item 1. Business............................................. 1
Item 2. Properties........................................... 3
Item 3. Legal Proceedings.................................... 4
Item 4. Submission of Matters to a Vote of Security Holders.. 4
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.......................... 4
Item 6. Selected Financial Data.............................. 5
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 6
Item 8. Financial Statements and Supplementary Data.......... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 50
Part III
Item 10. Directors and Executive Officers of the Registrant... 51
Item 11. Executive Compensation............................... 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 51
Item 13. Certain Relationships and Related Transactions....... 51
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 52
Signatures...................................................... 53
PART I
Item 1 - Business
Sterling Financial Corporation
Sterling Financial Corporation (the "Corporation") is a Pennsylvania
business corporation, based in Lancaster, Pennsylvania. The Corporation was
organized on February 23, 1987 and became a bank holding company through the
acquisition on June 30, 1987 of all the outstanding stock of The First
National Bank of Lancaster County, now by change of name, Bank of Lancaster
County, N.A.
In addition, the Corporation also owns all of the outstanding stock of a
non-bank subsidiary, Sterling Mortgage Services, Inc., a mortgage service
company formed by the Corporation as a wholly owned subsidiary that presently
is considered inactive.
The Corporation provides a wide variety of commercial banking and trust
services through its wholly owned subsidiary, Bank of Lancaster County, N.A.
(the "Bank").
A partial source of operating funds for the Corporation is dividends
provided by the Bank. The Corporation's expenses consist principally of
operating expenses. Dividends paid to stockholders are, in part, obtained by
the Corporation from dividends declared and paid to it by the Bank.
As a bank holding company, the Corporation is registered with the Federal
Reserve Board in accordance with the requirements of the Federal Bank Holding
Company Act and is subject to regulation by the Federal Reserve Board and by
the Pennsylvania Department of Banking.
Bank of Lancaster County
The Bank is a full service commercial bank operating under charter from
the Comptroller of the Currency. On July 29, 1863, authorization was given by
the Comptroller of the Currency to The First National Bank of Strasburg to
commence the business of banking. On September 1, 1980, the name was changed
to The First National Bank of Lancaster County and at the time of the holding
company reorganization on June 30, 1987, the name was changed to its present
name, Bank of Lancaster County, N.A. At December 31, 1995, the Bank had total
assets of $711,123,000 and total deposits of $610,170,000.
The main office of the Bank is located at 1 East Main Street, Strasburg,
Pennsylvania. In addition to its main office, the Bank had twenty-three (23)
branches in Lancaster County and one (1) branch in Chester County,
Pennsylvania in operation at December 31, 1995.
The Bank provides a full range of banking services. These include
demand, savings and time deposit services, NOW (Negotiable Order of
Withdrawal) accounts, money market accounts, safe deposit boxes, VISA credit
card, and a full spectrum of personal and commercial lending activities. The
Bank maintains correspondent relationships with major banks in New York City
and Philadelphia. Through these correspondent relationships, the Bank can
offer a variety of collection and international services.
With the installation of three automated teller machines (ATMs) in April
of 1983, the Bank was the first financial institution in Lancaster County to
join the MAC (Money Access Center) Network. The Bank now has 17 ATMs in
Lancaster County. The Bank became a participating member of the Plus System
in the Fall of 1984. This membership entitles the Bank's MAC/Plus cardholders
to have access to a nationwide network of over 119,000 ATMs.
The Bank introduced Discount Brokerage Service in July, 1983. This
service is offered in coordination with TradeStar Investments, Inc., an
affiliate of BHC Securities, Inc. and meets the needs of the commission-
conscious investor. In 1992 the Bank began offering mutual funds to
customers. We believe these services are important additions to our product
line and make a statement about our progressive attitude in providing
financial services for the future.
The Bank was given permission to open a Trust Department by the
Comptroller of the Currency on May 10, 1971. The Trust Department provides
personal and corporate trust services. These include estate planning,
administration of estates and the management of living and testamentary trusts
and investment management services. Other services available are pension and
profit sharing trusts and self-employed retirement trusts. Trust Department
assets totaled nearly $220 million at December 31, 1995.
On January 31, 1983, the Bank purchased Town & Country, Inc. which is a
vehicle and equipment leasing company operating in Pennsylvania and other
states. Its principal office is located at 640 East Oregon Road, Lancaster,
PA. Town & Country, Inc. employs thirty six (36) people.
The Bank's principal market area is Lancaster County. Lancaster County is
the sixth largest county in Pennsylvania, in terms of population, behind
Philadelphia, Allegheny, Montgomery, Delaware and Bucks. Lancaster County,
with an area of 949 square miles has a population of approximately 443,000
people. Lancaster's tradition of economic stability has continued, with
agriculture, industry and tourism all contributing to the overall strength of
the economy. Lancaster County has one of the strongest and most stable
economies in the state. No single sector dominates the county economy.
One of the best agricultural areas in the nation, Lancaster County ranks
first among Pennsylvania counties and one of the top 20 farm markets in the
country. Lancaster County is also one of the leading industrial areas in the
state. The county is considered a prime location for manufacturing, away from
congested areas, yet close to major east coast markets. Diversification of
industry helps to maintain the economic stability of the county. The
unemployment rate of the county in December 1995 was 4.3% which was lower than
the state (6.3%) and national (5.4%) levels. The 1995 average county jobless
rate was 4.2% of the work force, down from 4.4% in 1994 and 4.5% in 1993.
Lancaster County, with its many historic sites, well-kept farmlands and the
large Amish community has become very attractive to tourists and is one of the
top tourist attractions in the U.S.
The Bank is subject to intense competition in all respects and areas of
its business from banks and other financial institutions, including savings
and loan associations, finance companies, credit unions and other providers of
financial services. There are 15 full-service commercial banks with offices
in Lancaster County with some of these banks having branches located
throughout Lancaster County and beyond. The institutions range in asset size
from approximately $173 million to over $41 billion. Five (5) banks in our
trade area exceed $5 billion in assets. Several banks are part of bank
holding companies. One bank is part of a bank holding company that has assets
in excess of $73 billion while another bank is part of a bank holding company
that has over $40 billion in assets. Due to our location, we are in direct
competition with the larger banks as well as a number of smaller banks. As of
December 31, 1995, the Bank ranked, as measured by total deposits, as the
fourth largest in market share within Lancaster County of the banks doing
business in Lancaster County. The Bank is not, however, the fourth largest
bank in Lancaster County. As of December 31, 1995, the Bank had total assets
of over $711 million and ranked tenth on this basis among the commercial banks
with offices located in Lancaster County.
There has not been a material portion of the Bank's deposits obtained
from a single person or a few persons, including federal, state or local
governments and agencies thereunder and the loss of any single or any few
customers would not have a materially adverse effect on the business of the
bank.
The Bank has no significant foreign sources or applications of funds.
As of December 31, 1995, there were 379 persons employed by the Bank, of
which 279 were full-time and 100 were part-time. These figures do not include
employees of Town & Country, Inc. which employed 36 persons.
On August 11, 1995, the Bank and CoreStates Financial Corporation signed
a definitive agreement for the Bank to purchase from CoreStates three retail
banking offices in Ephrata, Leola and North Catasauqua, Pennsylvania. The
acquisition agreement was subsequently amended to remove the North Catasauqua
branch from the transaction. On December 1, 1995, the Bank completed the
transaction involving the acquisition of the Ephrata and Leola branches of
CoreStates. The acquisition involved primarily the assumption of certain
deposit liabilities in the approximate amount of $22 million and the
acquisition of certain assets in the approximate amount of $700,000.
The Bank is subject to regulation and periodic examination by the
Comptroller of the Currency. Its deposits are insured by the Federal Deposit
Insurance Corporation, as provided by law.
Item 2 - Properties
The Bank, in addition to its main office, had, at December 31, 1995, a
branch network of 24 offices and 2 off-site electronic MAC/ATM installations.
All branches are located in Lancaster County with the exception of one office
which is located in Chester County. Branches at twelve (12) locations are
occupied under leases and at three branches, the Bank owns the building, but
leases the land. One off-site MAC/ATM installation is occupied under lease.
All other properties were owned in fee. All real estate and buildings owned
by the Bank are free and clear of encumbrances. The Corporation owns no real
estate.
The Administrative Service Center of Bank of Lancaster County, N.A. is
owned in fee by the Bank, free and clear of encumbrances.
The building occupied by Town & Country, Inc., a wholly owned subsidiary
of the Bank, is owned in fee by Town & Country, Inc., free and clear of
encumbrances.
The leases referred to above expire intermittently over the years through
2022 and most are subject to one or more renewal options. Aggregate annual
rentals for real estate paid during 1995 did not exceed three percent of its
operating expenses.
The Bank completed construction of a new headquarters building in 1995
which includes a branch banking office and also serves as headquarters for
Sterling Financial Corporation. Occupancy took place in July of 1995. The
three-story building contains approximately 53,000 square feet. The Bank and
the Corporation occupy approximately 43,000 square feet while nearly 10,000
square feet has been leased to other tenants. The building is owned in fee by
the Bank, free and clear of encumbrances.
Item 3 - Legal Proceedings
As of December 31, 1995, there were no material pending legal
proceedings, other than ordinary routine litigation incidental to the
business, to which the Corporation or its subsidiaries are a party or by which
any of their property is the subject.
Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of 1995.
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
The common stock of the Corporation is not actively traded. There are
10,000,000 shares of common stock authorized and the total number of shares
outstanding as of December 31, 1995 was 5,925,527. As of December 31, 1995,
the Corporation had approximately 2,744 holders of record of its common stock.
There is no other class of common stock authorized or outstanding. During
1995, the price range of the common stock known by management to have traded
was $28.75 to $31.50 per share. A regular $.15 per share dividend, as well as
a $.25 per share "Special Dividend", was declared in the second quarter of
1995 and is reflected in the table below. The Corporation is restricted as to
the amount of dividends that it can pay holders of its common stock by virtue
of the restrictions on the Bank's ability to pay dividends to the Corporation.
See Note 17 to the 1995 Consolidated Financial Statements elsewhere herein.
The Corporation declared a two-for-one stock split in the form of a 100% stock
dividend in 1994. The following table reflects the bid and asked prices
reported for the common stock at the end of the period indicated and the cash
dividends declared on the common stock for the periods indicated. All
information has been retroactively restated to give effect to the two-for-one
stock split in 1994. In the absence of an active market, these prices may not
reflect the actual market value of the Corporation's stock for the periods
reported.
1995 Bid Ask Dividend
First Quarter $29.00 $30.25 $.15
Second Quarter 29.50 30.50 .40
Third Quarter 29.25 30.00 .17
Fourth Quarter 28.75 30.00 .17
1994 Bid Ask Dividend
First Quarter $23.125 $24.375 $.14
Second Quarter 24.25 25.125 .14
Third Quarter 27.00 28.50 .15
Fourth Quarter 28.75 30.75 .15
The prices used in the previous table represent bid and asked prices
furnished by F.J. Morrissey & Company; Hopper Soliday & Co., Inc.; Legg Mason
Wood Walker, Inc.; Prudential Securities; Ryan, Beck & Company; Sandler
O'Neill & Partners, L.P.; or The National Quotation Bureau. These quotations
reflect inter-dealer prices, without retail markup, markdown or commission.
The Corporation maintains a Dividend Reinvestment and Stock Purchase Plan
for eligible shareholders who elect to participate in the plan. A copy of the
Prospectus for this plan can be obtained by writing to: Bank of Lancaster
County, N.A. Dividend Reinvestment and Stock Purchase Plan, 101 North Pointe
Boulevard, Lancaster, Pennsylvania 17604-4133.
Item 6 - Selected Financial Data
The following selected financial data should be read in conjunction with
the Corporation's consolidated financial statements and the accompanying notes
presented elsewhere herein.
Summary of Operations
(Dollars in thousands, except per share data)
Years Ended 1995 1994 1993 1992 1991
Interest income.............$ 48,850 $ 41,931 $ 40,092 $ 40,284 $ 42,689
Interest expense............ 21,153 14,926 15,042 17,818 22,793
------ ------ ------ ------ ------
Net interest income......... 27,697 27,005 25,050 22,466 19,896
Provision for loan losses... 534 1,081 2,430 2,296 1,789
------ ------ ------ ------ ------
Net interest income after
provision for loan losses.. 27,163 25,924 22,620 20,170 18,107
Other income................ 8,293 7,043 8,979 7,926 6,721
Other expenses.............. 23,423 22,053 21,048 18,922 16,995
------ ------ ------ ------ ------
Income before income taxes.. 12,033 10,914 10,551 9,174 7,833
Applicable income taxes..... 3,039 2,637 2,749 2,331 1,929
------ ------ ------ ------ ------
NET INCOME..................$ 8,994 $ 8,277 $ 7,802 $ 6,843 $ 5,904
====== ====== ====== ====== ======
Per Common Share:*
Net income................ $ 1.52 $ 1.42 $ 1.36 $ 1.21 $ 1.06
Cash dividends declared**. .89 .58 .54 .48 .44
Book value................ 10.79 9.76 8.58 7.56 6.75
Book value (excluding
SFAS 115)............... 10.51 9.69 8.58 7.56 6.75
Average shares outstanding 5,909,641 5,837,103 5,728,400 5,635,302 5,551,556
Ratios:
Return on average assets.. 1.36% 1.38% 1.41% 1.34% 1.25%
Return on average equity.. 15.02% 15.47% 16.90% 16.99% 16.63%
Financial Condition at
Year-End:
Assets.................... $ 711,154 $ 633,395 $ 587,883 $ 544,404 $ 495,234
Loans (net of unearned)... 426,312 392,649 359,365 348,529 317,730
Deposits.................. 610,105 537,002 505,680 473,184 434,523
Stockholders' Equity***... 63,909 57,285 49,467 42,794 37,737
Average Assets............ 659,335 600,263 555,216 510,439 471,488
*Figures prior to 1994 were retroactively restated for various stock dividends, a
three-for-two stock split on November 30, 1992, a two-for-one stock split on September
1, 1994 and for comparative purposes.
**The dividend in 1995 includes a $.25 per share "Special Dividend" which was declared
in the second quarter of 1995.
***Stockholders' Equity prior to 1993 has been restated for the retroactive effect of
SFAS No. 109.
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion provides management's analysis of the
consolidated financial condition and results of operations of Sterling
Financial Corporation (the "Corporation") and subsidiaries, Bank of Lancaster
County, N.A. (the "Bank") and its subsidiary, Town & Country, Inc. and
Sterling Mortgage Services, Inc. (presently inactive). It should be read in
conjunction with the audited financial statements and footnotes appearing
elsewhere in this report.
(All dollar amounts presented in the tables are in thousands, except per share
data.)
Results of Operations Summary
Net income for 1995 was $8,994,000, an increase of $717,000 or 8.7% over
the $8,277,000 earned in 1994. The results of 1994 were $475,000 or 6.1%
higher than the $7,802,000 reported in 1993. Earnings per share on net income
amounted to $1.52, $1.42, and $1.36 for the years ended 1995, 1994 and 1993
respectively. Earnings per share were computed by dividing net income by the
weighted average number of shares of common stock outstanding which were
5,909,641, 5,837,103 and 5,728,400 for 1995, 1994 and 1993 respectively.
Figures prior to 1994 were retroactively restated to reflect a two-for-one
stock split in the form of a 100% stock dividend paid in 1994 and a 5% stock
dividend paid in December 1993.
Return on average total assets was 1.36% in 1995 compared to 1.38% in
1994 and 1.41% in 1993. Return on average stockholders' equity was 15.02% in
1995 compared to 15.47% in 1994 and 16.90% in 1993.
Growth in earning assets was the primary factor contributing to the
increased earnings in 1994, while in 1995, both volume and an increase in
rates contributed to increased earnings. As of December 31, 1995, earning
assets were approximately $629 million compared to $563 million at December
31, 1994 and $522 million at December 31, 1993. Average earning assets for
1995 increased nearly $49 million to approximately $587 million, up 9.1% from
the prior year. Similarly, in 1994 average earning assets increased
approximately $40 million, up 8% from 1993. The current year increase as well
as the increase in 1994 was primarily due to increases in both loans and
investments.
Average interest-bearing liabilities increased nearly $48 million or
10.2% in 1995 compared to an increase of nearly $29.1 million, or 6.6% in
1994.
The increase in average earning assets exceeded the increase in average
interest-bearing liabilities in both 1995 and 1994.
Provision for loan losses decreased to $534,000 in 1995 from $1,081,000
in 1994. The provision in 1993 was $2,430,000.
Non-interest income increased $1,250,000 in 1995. This compares to a
decrease of $1,936,000 in 1994. The decrease in 1994 was primarily a result
of a decrease in mortgage banking activities due to sudden increases in rates
on mortgages originated and sold, as well as decreased volumes of originations
and subsequent sales.
Non-interest expenses increased $1,370,000 or 6.2% in 1995 compared to an
increase of $1,005,000 or 4.8% in 1994 over 1993.
The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth
of total assets and on non-interest expenses, which tend to rise during
periods of general inflation. The level of inflation over the last few years
has been declining.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Act") addresses the recapitalization of the bank insurance fund and is
designed to limit risk within the banking industry. On August 8, 1995, the
Federal Deposit Insurance Corporation (the "FDIC") Board of Directors voted to
significantly reduce the deposit premiums paid by most Bank Insurance Fund
(the "BIF")-insured institutions to an average of approximately 4.4 cents per
$100 of domestic deposits once the FDIC confirmed that the BIF met a reserve
ratio of 1.25%. The FDIC determined that the BIF was fully recapitalized at
the end of May 1995. As a result, the Bank received a refund in an amount
equal to insurance overpayments for the months June through September. Under
the new assessment rate schedule for the BIF, the Bank's annual rate went to 4
cents per $100 of assessable deposits, down from the current rate of 23 cents
per $100. On November 14, 1995, the FDIC Board of Directors voted to reduce
the insurance premiums paid on deposits covered by the BIF, effective for the
first semiannual assessment period of 1996. Under the new rate structure for
the BIF, assessment rates will be lowered by 4 cents per $100 of assessable
deposits for all risk categories, subject to the statutory requirement that
all institutions pay at least $2,000 annually for FDIC insurance. Since the
Bank is included in the lowest premium paying category, the Bank will pay the
statutory annual minimum of $2,000. As a result of the above FDIC action, the
Bank experienced a reduction of the FDIC assessment in 1995 over 1994. Under
current assessment, the Bank should realize a reduction in 1996 over 1995.
The passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Riegle Community Development and Regulatory
Improvement Act may have a significant impact upon the Corporation. The key
provisions pertain to interstate banking and interstate branching as well as a
reduction in the regulatory burden on the banking industry. Since September
1995, bank holding companies may acquire banks in other states without regard
to state law. In addition, banks can merge with other banks in another state
beginning in June 1997. States may adopt laws preventing interstate branching
but, if so, no out-of-state bank can establish a branch in such state and no
bank in such state may branch outside the state. Pennsylvania recently
amended the provisions of its Banking Code to authorize full interstate
banking and branching under Pennsylvania law and to facilitate the operations
of interstate banks in Pennsylvania. As a result of legal and industry
changes, management predicts that consolidation will continue as the financial
services industry strives for greater cost efficiencies and market share.
Management believes that such consolidation may enhance its competitive
position as a community bank. There are numerous proposals before Congress to
modify the financial services industry and the way commercial banks operate.
However, it is difficult to determine at this time what effect such provisions
may have until they are enacted into law. Except as specifically described
above, management believes that the effect of the provisions of the
aforementioned legislation on the liquidity, capital resources and results of
operations of the Corporation will be immaterial. Management is not aware of
any other current specific recommendations by regulatory authorities or
proposed legislation, which if they were implemented, would have a material
adverse effect upon the liquidity, capital resources or results of operations,
although the general cost of compliance with numerous and multiple federal and
state laws and regulations does have and in the future may have a negative
impact on the Corporation's results of operations.
Aside from those matters described above, management does not believe
that there are any trends or uncertainties which would have a material impact
on future operating results, liquidity or capital resources nor is it aware of
any current recommendations by the regulatory authorities which if they were
to be implemented would have such an effect.
Net Interest Income
The primary component of the Corporation's net earnings is net interest
income, which is the difference between interest and fees earned on interest-
earning assets and interest paid on deposits and borrowed funds. For
presentation and analytical purposes, net interest income is adjusted to a
taxable equivalent basis. For purposes of calculating yields on tax-exempt
interest income, the taxable equivalent adjustment equates tax-exempt interest
rates to taxable interest rates as noted in Table 1. Adjustments are made
using a statutory federal tax rate of 34% for 1995, 1994 and 1993.
Table 1 presents average balances, taxable equivalent interest income and
expense and the yields earned or paid on these assets and liabilities. The
increase in net interest income during 1995 resulted from increased volumes
and interest rates in average earning assets. The increases in net interest
income during 1994 was due primarily to increases in average earning assets.
Average earning assets increased 9.1% in 1995 and 8% in 1994. These increases
were primarily funded with interest-bearing liabilities which increased 10.2%
in 1995 and 6.6% in 1994.
Table 1 - Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential-Tax Equivalent Yields
(Unaudited)
Years ended December 31,
1995 1994 1993
Average Annual Average Annual Average Annual
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets
Interest bearing deposits
with banks..............$ 30 $ 2 6.78% $ 55 $ 2 3.79% $ 690 $ 27 3.84%
Federal Funds sold......... 7,583 449 5.92% 6,247 264 4.24% 6,234 191 3.07%
Investment securities:
U.S. Treasury securities. 28,696 1,675 5.84% 26,560 1,471 5.54% 21,447 1,253 5.84%
U.S. Government agencies. 27,999 1,761 6.29% 23,353 1,395 5.97% 21,832 1,458 6.68%
State and Municipal
securities.............. 48,884 4,083 8.35% 44,442 3,781 8.51% 37,451 3,440 9.18%
Other securities......... 66,990 4,294 6.41% 62,476 3,961 6.34% 52,941 3,726 7.04%
------- ------- ------ -------- ------- ------ -------- ------- -----
Total investment securities172,569 11,813 6.85% 156,831 10,608 6.76% 133,671 9,877 7.39%
Loans:
Commercial...............226,032 21,284 9.42% 207,844 17,743 8.54% 195,562 16,327 8.35%
Consumer.................106,171 9,766 9.20% 103,572 8,861 8.56% 99,761 8,878 8.90%
Mortgages................ 32,739 2,771 8.46% 26,704 2,274 8.51% 27,714 2,490 8.99%
Leases................... 41,974 4,350 10.36% 36,802 3,667 9.96% 34,533 3,658 10.59%
------- ------- ------ -------- ------- ------ -------- ------- -----
Total loans................406,916 38,171 9.38% 374,922 32,545 8.68% 357,570 31,353 8.77%
------- ------- ------ -------- ------- ------ -------- ------- -----
Total earning assets.......587,098 50,435 8.59% 538,055 43,419 8.07% 498,165 41,448 8.32%
Allowance for loan losses.. (7,155) (7,472) (5,984)
Cash and due from banks.... 27,763 27,746 26,863
Other non-earning assets... 51,629 41,934 36,172
------- -------- --------
Total non-earning assets... 72,237 62,208 57,051
------- -------- ------ -------- -------- ------ -------- -------- ------
Total assets..............$659,335 $ 50,435 7.65% $600,263 $ 43,419 7.23% $555,216 $ 41,448 7.47%
======== ======== ====== ======== ======== ====== ======== ======== ======
Liabilities and Stockholders' Equity
Deposits:
Demand deposits
Noninterest-bearing....$ 66,133 0 0.00% $64,446 $ 0 0.00% $ 57,869 $ 0 0.00%
Demand deposits
Interest-bearing........239,036 7,181 3.00% 229,693 5,375 2.34% 211,406 5,484 2.59%
Savings deposits......... 54,982 1,333 2.42% 58,864 1,324 2.25% 45,302 1,222 2.70%
Time deposits............194,512 10,579 5.44% 158,994 6,884 4.33% 163,497 7,085 4.33%
------- -------- ------ -------- ------- ------ -------- ------- ------
Total deposits.............554,663 19,093 3.44% 511,997 13,583 2.65% 478,074 13,791 2.88%
Other borrowed funds....... 29,143 2,060 7.07% 22,144 1,343 6.06% 20,367 1,251 6.15%
Other liabilities.......... 14,856 12,227 10,613
Stockholders' equity....... 60,673 53,895 46,162
------- -------- ------ -------- ------- ------ -------- ------- ------
Total liabilities and
Stockholders' equity....$659,335 $ 21,153 3.21% $600,263 $ 14,926 2.49% $555,216 $ 15,042 2.71%
======== ======== ====== ======== ======== ====== ======== ======== =====
Net interest income/
Average total assets...... $ 29,282 4.44% $ 28,493 4.75% $ 26,406 4.76%
Net interest income/
Average earning assets.... $ 29,282 4.99% $ 28,493 5.30% $ 26,406 5.30%
Net interest income on a fully taxable equivalent basis increased by
$789,000 in 1995 compared to an increase of $2,087,000 in 1994. Table 2
indicates that of the increase in 1995, $1,803,000 was the result of increased
volumes. This figure was reduced by $1,014,000 as a result of increases in
interest rates. The increase in interest rates had more of an effect on
interest paid on interest-bearing liabilities than on earning assets. The
increase in 1994 resulted in $2,453,000 from increased volumes while a
reduction of $366,000 was realized from decreases in interest rates.
For the year 1995 compared to 1994, loan volumes, on average, increased
nearly $32 million and income earned on loans increased $5,626,000, tax
adjusted. This compares to a volume increase of over $17.3 million in 1994
over 1993 with an increase in income earned on loans amounting to $1,192,000.
As a result of increased volumes in 1995, nearly $2.8 million contributed to
the increase in income on loans. Rates charged on loans began to increase in
1994 and into 1995. The increase in rates generated over $2.8 million of the
total increase in income earned on loans. Increased volumes in loans in 1994
contributed over $1.5 million to the increase in income while a reduction of
$330,000 was realized due to decreases in interest rates.
Total investment securities increased over $21.6 million in 1995 over
1994 compared to an increase of over $23.7 million in 1994 over 1993. The
increased volumes in both periods were primarily responsible for the increase
in interest income on securities. Table 2 indicates that of the increase in
interest income in 1995, $1,064,000 was the result of increased volumes while
$141,000 resulted from an increase in interest rates. Increased volumes in
securities in 1994 contributed over $1.7 million to the increase in income
while nearly a $1 million reduction was generated due to decreases in interest
rates.
Interest-bearing deposits, on average, grew over $41 million in 1995. In
addition to an increase in interest expense due to volumes, interest expense
also increased due to changes in interest rates. Average deposits grew over
$27 million in 1994. The lower cost of funds for this period reflect a
decrease in interest expense over the 1993 period. The assumption of certain
deposit liabilities as a result of the acquisition of two retail banking
offices from CoreStates on December 1, 1995 added over $20 million in
interest-bearing deposits.
Table 2 - Analysis of Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below, which is
computed on a tax equivalent basis, analyses changes in net interest income
for the periods indicated by their rate and volume components.
1995 Versus 1994 1994 Versus 1993
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
Volume Rate Total Volume Rate Total
Interest Income
Interest on deposits
with banks...........$ (1) $ 1 $ 0 $ (25) $ 0 $ (25)
Interest on federal
funds sold........... 57 128 185 0 73 73
Interest on investment
securities........... 1,064 141 1,205 1,711 (980) 731
Interest and fees on
loans................ 2,777 2,849 5,626 1,522 (330) 1,192
------- -------- --------- -------- -------- -------
Total interest income...$ 3,897 $ 3,119 $ 7,016 $ 3,208 $ (1,237) $ 1,971
------- -------- --------- -------- -------- -------
Interest Expense
Interest on
interest-bearing
demand deposits......$ 219 $ 1,587 $ 1,806 $ 474 $ (583) $ (109)
Interest on
savings deposits...... (87) 96 9 366 (264) 102
Interest on
time deposits......... 1,538 2,157 3,695 (195) (6) (201)
Interest on
borrowed funds........ 424 293 717 110 (18) 92
------- -------- -------- -------- --------- --------
Total interest expense..$ 2,094 4,133 6,227 $ 755 $ (871) $ (116)
------- -------- -------- -------- --------- --------
Net interest income.....$ 1,803 $ (1,014) $ 789 $ 2,453 $ (366) $ 2,087
======= ======== ======== ======== ======== ========
Provision for Loan Losses
The provision for loan losses charged against earnings was $534,000 in
1995 compared to $1,081,000 in 1994 and $2,430,000 in 1993. The provision
reflects the amount deemed appropriate by management to produce an adequate
reserve to meet the present and foreseeable risk characteristics of the loan
portfolio. Management's judgement is based on the evaluation of individual
loans and their overall risk characteristics, past loan loss experience, and
other relevant factors. Net charge-offs amounted to $394,000 in 1995,
$621,000 in 1994 and $650,000 in 1993.
The provision for loan loss was greater during 1993 in order for the Bank
to provide an adequate reserve based on the evaluation of individual loans and
their current characteristics and current economic condition. The reserve
accordingly was increased to 2.00% of net loans outstanding. The allowance for
loan losses as a percent of loans at December 31, 1994 was 1.95%, while at
December 31, 1995 it was 1.82%.
Non-Interest Income
Table 3 - Non-Interest Income
1995/1994 1994/1993
Increase Increase
(Decrease) (Decrease)
1995 Amount % 1994 Amount % 1993
Income from fiduciary activities..$ 856 $ 114 15.4% $ 742 $ 103 16.1%$ 639
Service charges on deposit
accounts....................... 2,010 212 11.8% 1,798 (93) (4.9%) 1,891
Other service charges, commissions
and fees....................... 1,716 177 11.5% 1,539 (38) (2.4%) 1,577
Mortgage banking income........... 525 (110) (17.3%) 635 (1,800) (73.9%) 2,435
Other operating income............ 3,186 857 36.8% 2,329 (100) (4.1%) 2,429
Investment securities gains or
(losses)....................... 0 0 0% 0 (8)(100.0%) 8
----- ------ ------ ------ ------- ------ ------
Total.............................$8,293 $ 1,250 17.7% $7,043 $(1,936) (21.6%)$8,979
====== ======= ====== ====== ====== ====== ======
Non-interest income, recorded as other operating income, consists of
income from fiduciary activities, service charges on deposit accounts, other
service charges, commissions and fees, mortgage banking income and other
income such as safe deposit box rents and income from operating leases.
Income from fiduciary activities in the amount of $856,000 in 1995 was
$114,000 or 15.4% greater than the $742,000 recorded in 1994. Income in 1994
was $103,000 or 16.1% greater than the $639,000 recorded in 1993. Fees
increased primarily due to increased transaction volumes.
Service charges on deposit accounts increased to $2,010,000, an increase
of $212,000 or 11.8% over 1994 service charge income of $1,798,000. Service
charges on deposit accounts in 1994 was $93,000 less than the $1,891,000
reported for 1993.
Other service charges, commissions and fees amounted to $1,716,000 in
1995 compared to $1,539,000 in 1994 and $1,577,000 in 1993. A major
contributor to the increase in 1995 was certain fees relating to VISA
operations.
Income from mortgage banking activities in the amount of $525,000
decreased $110,000 over 1994, due primarily to an increase in interest rates
which had an effect on the number of refinancings. This compares to a
decrease of $1,800,000 in 1994 over 1993. In 1990 the Bank began originating
and selling qualified residential mortgage loans in the secondary market. All
mortgages sold were originated by the Bank's network of 25 branches within its
market area. All mortgages sold were purchased by the Federal Home Loan
Mortgage Corporation (Freddie Mac), with the Bank retaining all mortgage
servicing rights. No mortgages have been acquired from third parties, nor
have any servicing rights been purchased. The Bank's mortgage servicing
portfolio totaled $142 million as of December 31, 1995.
The year 1993 was outstanding for the Bank's mortgage banking operation,
with $72 million in mortgage sales from the Bank's marketplace. These
operations contributed $2.4 million of other income in 1993, compared to
$635,000 in 1994 and $525,000 in 1995. The falling interest rate environment
through most of the 1993 period resulted in extraordinary volumes of mortgage
refinancings, coupled with a strong local market for real estate sales. An
estimated 65% of this volume involved mortgage refinancings. The decrease in
mortgage banking income in 1995 and 1994 was a result of the sudden and
continuing increases in rates on mortgages originated and sold, as well as
decreased volumes of originations and subsequent sales. The period in 1993
reflects larger volumes due to refinancings. Mortgage sales amounted to
approximately $24 million in 1994 and $16.1 million in 1995.
Other operating income increased $857,000 to $3,186,000 in 1995 from
$2,329,000 in 1994. Other income for 1993 was $2,429,000. A major
contributor to other operating income is income generated from operating
leases. Income on operating leases increased over $476,000 in 1995 over 1994.
Another contributor to the increase in 1995 was nearly a $270,000 gain on
other real estate sold.
Investment securities transactions reflect a gain of $8,000 in 1993. The
gain listed for this year resulted when certain securities were called at a
premium. Securities had been written to par when calls were made thus
generating a gain on the securities called. There were no securities sold
during 1995, 1994 or 1993.
The Bank does not engage in trading activities. Therefore, there was no
impact on current year earnings or a restatement of previously issued
financial statements in connection with the adoption of SFAS 115.
As a result of the above, total other operating income increased
$1,250,000 in 1995 over 1994 compared to a decrease of $1,936,000 in 1994 over
1993.
Non-Interest Expense
Table 4 - Non-Interest Expense
1995/1994 1994/1993
Increase Increase
(Decrease) (Decrease)
1995 Amount % 1994 Amount % 1993
Salaries and employee benefits...$13,040 $ 776 6.3% $12,264 $ 698 6.0% $11,566
Net occupancy expense............. 1,721 244 16.5% 1,477 122 9.0% 1,355
Furniture & equipment expense..... 1,605 226 16.4% 1,379 126 10.1% 1,253
FDIC insurance assessment......... 622 (506)(44.9%) 1,128 76 7.2% 1,052
Other operating expense........... 6,435 630 10.9% 5,805 (17) (.3%) 5,822
----- ------ ----- ----- ----- ----- -----
Total............................$23,423 $ 1,370 6.2% $22,053 $1,005 4.8% $21,048
======= ======= ===== ======= ====== ===== =======
Non-interest expense consists of salaries and employee benefits, net
occupancy expense, furniture and equipment expense and other operating
expenses.
Total operating expenses for 1995 were $23,423,000 compared to
$22,053,000 in 1994. This represented an increase of $1,370,000 or 6.2%.
This compares to an increase of $1,005,000 or 4.8% in 1994.
The largest component of the Corporation's other operating expense is
salaries and employee benefits which increased to $13,040,000 in 1995 or
$776,000 (6.3%) over the $12,264,000 reported in 1994. In 1994, expenses
increased $698,000 (6%) over the $11,566,000 reported in 1993. The increase
in 1995 and 1994 was primarily due to increases in staff as well as increases
in wages and increased costs of employee benefits. During 1995, three branch
offices were opened and two branch offices were acquired from another
financial institution.
Occupancy expense increased $244,000 or 16.5% to $1,721,000 in 1995 from
$1,477,000 in 1994. By comparison, during 1994, there was an increase of
$122,000 or 9%. Two new branch facilities were added in late 1993 which added
to the expense of 1994. In 1995, the Bank completed construction of a new
headquarters building which also includes branch banking facilities. In
addition, two new branch offices were opened and two branch offices were
acquired from another financial institution in 1995. These additions
contributed to the increase in occupancy expense.
Furniture and equipment expenses were $1,605,000 for 1995 and $1,379,000
for 1994. This represents an increase of $226,000 or 16.4%. Reflected in
this increase is an increase of depreciation expense in 1995 amounting to
$138,000. Service contracts on equipment was another major contributor to the
increase in 1995. Expenses in 1994 were $126,000 greater than those recorded
in 1993.
There was a significant reduction in the FDIC insurance assessment in
1995 over 1994. The assessment for 1995 was $622,000 compared to $1,128,000
in 1994. This reduction was a result of a new assessment rate schedule
approved by the FDIC. Under the new assessment rate schedule, the Bank's
annual rate went to 4 cents per $100 of assessable deposits, down from the
rate of 23 cents per $100. The new rate was effective June 1, 1995.
Other operating expenses increased $630,000 or 10.9% in 1995 compared to
a decrease of $17,000 in 1994. The increase noted in 1995 is in line with
rising costs associated with acquiring services covered in this category of
expense. Expenses covered in this category include postage, Pennsylvania
Shares Tax, advertising and marketing, professional services, telephone,
stationery and forms, ATM fees, VISA fees, insurance premiums, expense of
other real estate owned and other expense categories not specifically
identified on the income statement. Contributing to the increase in 1995 were
increases in marketing expense, Pennsylvania Shares Tax, professional
services, postage, stationery and forms, VISA fees, telephone expense and
expenses related to other real estate owned.
Income Taxes
Income tax expense totaled $3,039,000 in 1995 compared to $2,637,000 in
1994 and $2,749,000 in 1993. These increases resulted from higher levels of
taxable income and increased earnings each year. The Corporation's effective
tax rate was 25.3% in 1995 compared with 24.2% in 1994 and 26.1% in 1993.
Utilization of tax credits in 1995 and 1994 resulted in a lower effective tax
rate than 1993 even though income before taxes increased in each of those two
years.
Financial Condition
Investment Portfolio
Table 5 - Investment Securities at Cost
The following table shows the amortized cost of the held-to-maturity
securities owned by the Corporation as of the dates indicated. Investment
securities are stated at cost adjusted for amortization of premiums and
accretion of discounts.
December 31,
1995 1994 1993
U.S. Treasury securities................$ 18,837 $ 28,225 $ 23,996
Obligations of other U.S. Government
agencies and corporations............. 18,473 24,101 22,880
Obligations of states and political
subdivisions.......................... 40,212 50,472 43,491
Mortgage-backed securities.............. 3,854 5,122 5,834
Other bonds, notes and debentures....... 38,944 50,811 47,959
--------- --------- ---------
Subtotal................................ 120,320 158,731 144,160
Non-marketable securities (1)........... 2,565 2,429 2,305
--------- --------- ---------
Total...................................$ 122,885 $ 161,160 $ 146,465
========= ========= =========
(1) Prior to adoption of SFAS 115 at January 1, 1994, all equity securities
were included in this category.
The following table shows the amortized cost and fair value of the
available-for-sale securities owned as of the dates indicated. During
December, 1995 the Corporation was given the opportunity for a one-time
transfer of securities from the held-to-maturity category to the available-
for-sale category. As the table indicates, securities were moved to the
available-for-sale category for U.S. Treasury securities, obligations of other
U.S. Government agencies and corporations, obligations of states and political
subdivisions and other bonds, notes and debentures. A total of $54,218,000
was moved from held-to-maturity to available-for-sale.
December 31,
1995 1994
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- -------- --------
U.S. Treasury securities............$ 11,046 $ 11,155 $ 1,472 $ 1,457
Obligations of other U.S. Government
agencies and corporations.......... 15,489 15,632 none none
Obligations of states and political
subdivisions....................... 19,622 19,945 none none
Mortgage-backed securities........... 1,249 1,242 1,344 1,256
Other bonds, notes and debentures.... 19,013 19,247 5,593 5,501
-------- --------- -------- --------
Subtotal............................. 66,419 67,221 8,409 8,214
Equity securities.................... 88 1,746 7 837
-------- --------- -------- --------
Total................................$ 66,507 $ 68,967 $ 8,416 $ 9,051
======== ========= ======== ========
Table 6 - Investment Securities (Yields)
The following table shows the maturities of held-to-maturity debt
securities at amortized cost as of December 31, 1995 and approximate weighted
average yields of such securities. Yields are shown on a tax equivalent
basis, assuming a 34% Federal income tax rate.
Over 1 thru Over 5 thru
1 Year and less 5 Years 10 Years Over 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury
securities....$ 5,861 6.31% $ 12,976 5.68% $ --- --% $ --- ---% $ 18,837 5.88%
Obligations of
other U.S.
Government
agencies and
corporations.. 3,742 6.67% 12,237 5.82% 1,994 7.25% 500 7.50% 18,473 6.19%
Obligations of
states and
political sub-
divisions..... 3,602 8.85% 14,039 8.36% 16,207 7.97% 6,364 7.77% 40,212 8.15%
Mortgage-backed
securities.... 475 7.94% 2,569 7.91% 615 8.52% 195 8.07% 3,854 8.02%
Other bonds,
notes and
debentures.... 11,544 6.05% 27,151 6.29% 249 7.04% --- ---% 38,944 6.22%
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
$ 25,224 6.64% $ 68,972 6.57% $ 19,065 7.90% $ 7,059 7.76% $120,320 6.86%
======== ====== ======== ====== ======== ====== ======= ====== ======== ======
The following table shows the maturities of available-for-sale debt
securities at amortized cost as of December 31, 1995 and approximate weighted
average yields of such securities. Yields are shown on a tax equivalent
basis, assuming a 34% Federal income tax rate.
Over 1 thru Over 5 thru
1 Year and less 5 Years 10 Years Over 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury
securities....$ 1,000 7.24% $ 9,537 5.94% $ 509 7.59% $ --- ---% $ 11,046 6.13%
Obligations of
other U.S.
Government
agencies and
corporations.. 2,002 6.32% 9,389 6.38% 4,098 6.79% --- ---% 15,489 6.48%
Obligations of
states and
political sub-
divisions..... --- ---% 1,699 7.62% 11,256 7.71% 6,667 8.20% 19,622 7.87%
Mortgage-backed
securities.... 248 8.35% 1,001 5.78% --- ---% --- ---% 1,249 6.29%
Other bonds,
notes and
debentures.... 2,359 6.87% 16,654 6.44% --- ---% --- ---% 19,013 6.49%
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
$ 5,609 6.80% $ 38,280 6.34% $ 15,863 7.47% $ 6,667 8.20% $ 66,419 6.83%
======== ====== ======== ====== ======== ====== ======= ====== ======== ======
Loans
Table 7 - Loan Portfolio
The following table sets forth the composition of the Corporation's loan
portfolio as of the dates indicated:
December 31,
1995 1994 1993 1992 1991
Commercial, financial and
agricultural..............$ 228,058 $ 208,918 $ 191,431 $ 172,482 $ 152,726
Real estate-construction... 6,378 8,542 10,265 16,044 12,147
Real estate-mortgage....... 33,124 30,505 22,335 30,445 31,943
Consumer................... 116,210 106,921 101,256 99,444 94,404
Lease financing (net of
unearned income)......... 43,904 38,771 35,443 32,768 31,283
---------- ---------- ---------- ---------- ----------
Total loans.................$ 427,674 $ 393,657 $ 360,730 $ 351,183 $ 322,503
========== ========== ========== ========== ==========
Table 8 - Loan Maturity and Interest Sensitivity
The following table sets forth the maturity and interest sensitivity of
the loan portfolio as of December 31, 1995:
After one
Within but within After
one year five years five years Total
Commercial, financial and agricultural..$104,193 $ 61,575 $ 62,290 $ 228,058
Real estate-construction................ 5,186 1,192 --- 6,378
--------- --------- --------- ---------
$109,379 $ 62,767 $ 62,290 $ 234,436
========= ========= ========= =========
Loans due after one year totaling $76,957,000 have variable interest
rates. The remaining $48,100,000 in loans have fixed rates.
Table 9 - Nonaccrual, Past Due and Restructured Loans
The following table presents information concerning the aggregate amount
of nonaccrual, past due and restructured loans:
December 31,
1995 1994 1993 1992 1991
Nonaccrual loans..........................$ 1,010 $ 2,127 $ 2,960 $ 4,129 $ 1,414
Accruing loans, past due
90 days or more......................... 330 1,127 522 519 409
-------- -------- -------- -------- --------
Total non-performing loans................ 1,340 3,254 3,482 4,648 1,823
Other real estate owned................... 252 759 251 360 250
-------- -------- -------- -------- --------
Total non-performing assets...............$ 1,592 $ 4,013 $ 3,733 $ 5,008 $ 2,073
======== ======== ======== ======== ========
Ratios:
Non-performing loans to
total loans......................... .31% .83% .97% 1.33% .57%
Non-performing assets to
total loans and other
real estate owned................... .37% 1.02% 1.04% 1.44% .65%
Non-performing assets to
total assets........................ .22% .63% .63% .92% .42%
Allowance for loan losses to
non-performing loans................ 580.6% 234.8% 206.2% 116.1% 241.4%
The economic conditions within the Corporation's market area remained
healthy in 1995. This is reflected in the unemployment rate for Lancaster
County, which is the Bank's primary market area. The jobless rate has stayed
relatively stable during the past year with an average of 4.2%, down from 4.4%
in 1994 and 4.5% in 1993. Lancaster County's unemployment rate has
historically been and continues to be one of the lowest among Pennsylvania's
14 metropolitan regions. It also remains well below the state unemployment
rate of 6.3% that was reported for November 1995.
The strength in the employment sector in Lancaster County was also seen
at the national level. The nation's unemployment rate spent the year in a
narrow band that many analysts believe is close to full employment as the
current recovery completes five years of growth. The prediction is for "solid
growth" for the local economy this year, some of that because of the political
environment in that this is an election year.
The Bank's loan delinquency, as a percent of loans outstanding, declined
during 1995. At December 31, 1995, this rate stood at .58% compared to 1.33%
and 1.45% for December 31, 1994 and December 31, 1993, respectively. The
decline in 1995 is attributed to the overall strength in the local and
national economies, the installation of a computerized collection system and a
substantial decline in non-accrual loans. The .58% is the lowest reported by
the Bank in recent history and exceeded expectations. During the year, total
nonaccrual loans and other real estate owned declined to $1,262,000
representing a decline of 56% from December 31, 1994. Total non-performing
assets declined to $1,592,000 compared to $4,013,000 for December 31, 1994
representing a 60% decline. The significant decline in non-accruals, other
real estate and non-performing assets was primarily due to concentrated
workout efforts, aided by improved economic conditions and individual borrower
performance. These factors resulted in improved payment performance and
payoffs.
The Bank's reserve coverage continued its improvement during the year as
reserves as a percent of non-performing loans increased to 581% compared with
235% for December 31, 1994.
A portion of the Bank's loan portfolio consists of loans to agricultural-
related borrowers. These loans consist of loans for a variety of purposes
within the industry. Agriculture remains strong in the county. Pennsylvania
is one of the top 20 farm markets in the country. A barometer of Lancaster
County's agricultural health indicates steady growth in most areas. While the
Bank is hopeful that this portion of its loan portfolio will continue to show
growth, it should be noted that these loans are susceptible to a variety of
external factors such as adverse climate, economic conditions, etc., in
addition to factors common to other industries.
Statistics on the local real estate market indicated residential
construction lagged behind the previous year's levels by 21%, while non-
residential construction surged 78% in part due to corporate expansions.
After a record-setting year in 1993 for home sales, home sales have declined
and were down about 4% from 1994, but the third and fourth quarters produced a
strong rebound. Declining interest rates have contributed to this rebound
which is expected to continue into at least the first half of 1996. Occupancy
rates for the best commercial office space remained high, and it is believed
good industrial space is in short supply.
Most of the Bank's business activity is with customers located within the
Bank's defined market area. Since the majority of the Bank's real estate
loans are located within this area, a substantial portion of the debtor's
ability to honor their obligations and increases and decreases in the market
value of the real estate collateralizing such loans may be affected by the
level of economic activity in the market area.
The general policy has been to cease accruing interest on loans when it
is determined that a reasonable doubt exists as to the collectibility of
additional interest. Interest income on these loans is only recognized to the
extent payments are received. Loans on a nonaccrual status amounted to
$1,010,000 at December 31, 1995 compared to $2,127,000 at December 31, 1994.
If interest income had been recorded on all such loans for the years
indicated, such interest income would have been increased by approximately
$143,997 and $276,956 for 1995 and 1994 respectively. Interest income
recorded on non-accrual loans amounted to $93,795 and none for 1995 and 1994
respectively. Potential problem loans are loans which are included as
performing loans, but for which possible credit problems of the borrower
causes management to have doubts as to the ability of such borrower to comply
with present repayment terms and which may eventually result in disclosure as
a non-performing loan. At December 31, 1995 there were no such loans that had
to be disclosed as potential problem loans.
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures", an amendment of SFAS No. 114, was implemented at
the beginning of 1995. The Bank has defined impaired loans as all loans on
nonaccrual status, except those specifically excluded from the scope of SFAS
No. 114, regardless of the credit grade assigned by loan review. All impaired
loans were measured by utilizing the fair value of the collateral for each
loan. When the measure of an impaired loan is less than the recorded
investment in the loan, the Bank will compare the impairment to the existing
allowance assigned to the loan. If the impairment is greater than the
allowance, the Bank will adjust the existing allowance to reflect the greater
amount or take a corresponding charge to the provision for loan losses. If
the impairment is less than the existing allowance for a particular loan, no
adjustments to the allowance or the provision for loan and lease losses will
be made. There was no adjustment necessary for the impaired loans for the
periods indicated.
The average amount of nonaccruals for the fourth quarter of 1995 was
$1,112,405 while the average for 1995 was $1,476,100.
The following table presents information concerning impaired loans at
December 31, 1995:
Gross impaired loans which have allowances..........$1,010
Less: Related allowances for loan losses......... 349
------
Net impaired loans..................................$ 661
======
At December 31, 1995, there were no concentrations exceeding 10% of total
loans. A concentration is defined as amounts loaned to a multiple number of
borrowers engaged in similar activities which would cause them to be similarly
affected by changes in economic or other conditions. There were no foreign
loans outstanding at December 31, 1995.
Allowance for Loan Losses
Table 10 - Summary of Loan Loss Experience
Years ended December 31,
1995 1994 1993 1992 1991
Allowance for Loan Losses:
Beginning balance.............$ 7,640 $ 7,180 $ 5,400 $ 4,400 $ 3,375
Loans charged off during year:
Commercial, financial and
agricultural.............. 50 157 194 843 327
Real estate mortgage........ 252 235 392 201 19
Consumer.................... 360 360 290 471 420
Lease financing............. 14 10 14 97 144
------- ------- ------- ------- -------
Total charge-offs........... 676 762 890 1,612 910
------- ------- ------- ------- -------
Recoveries:
Commercial, financial and
agricultural.............. 117 61 157 232 37
Real estate mortgage........ 72 2 8 none 13
Consumer.................... 91 77 63 76 58
Lease financing............. 2 1 12 8 38
------- ------- ------- ------- -------
Total recoveries............ 282 141 240 316 146
------- ------- ------- ------- -------
Net loans charged off......... 394 621 650 1,296 764
Additions charged to
operations.................. 534 1,081 2,430 2,296 1,789
------- ------- ------- ------- -------
Balance at end of year........$ 7,780 $ 7,640 $ 7,180 $ 5,400 $ 4,400
======= ======= ======= ======= =======
Ratio of net loans charged
off to average loans
outstanding................. .10% .17% .18% .39% .24%
Ratio of net loans charged
off to loans at end of year. .09% .16% .18% .37% .24%
Net loans charged off to
allowance for loan losses.. 5.06% 8.13% 9.05% 24.00% 17.36%
Net loans charged off to
provision for loan losses.. 73.78% 57.45% 26.75% 56.45% 42.71%
Allowance for loan losses as a
percent of average loans... 1.91% 2.04% 2.01% 1.64% 1.39%
Allowance for loan losses
as a percent of loans at
end of year................ 1.82% 1.95% 2.00% 1.55% 1.38%
Allowance for loan losses
as a percent of
non-performing loans....... 580.6% 234.8% 206.2% 116.1% 241.4%
The Bank experienced an improvement in net charge-offs recorded during
1995. For the year, the Bank recorded net charge-offs of $394,000 or .10% of
average loans outstanding, compared to $621,000 or .17% of average loans in
1994 and $650,000 or .18% of average loans in 1993. The low level of net
charge-offs is partially attributed to an aggressive collection of previously
charged-off loans.
The reduction in the provision for loan losses in 1995 reflects the
strength in the local economy and the improvements in the Bank's delinquency
rate, non-accruals, non-performing assets and problem loans.
The provision for loan losses charged to operating expense reflects the
amount deemed appropriate by management to produce an adequate reserve to meet
the present and inherent risk deemed present in the loan portfolio.
Management performs a quarterly assessment of the loan portfolio to determine
the appropriate level of allowance. The factors considered in this evaluation
include, but are not limited to, estimated loan losses identified through a
loan review process, general economic conditions, deterioration in pledged
collateral, past loan experience and trends in delinquencies and non-accruals.
Management uses available information to determine the appropriate level of
the allowance for possible loan losses. However, the allowance may be
affected in the future based upon changes in the economic conditions and other
factors. While there can be no assurance that material amounts of additional
loan loss provisions will not be required in the future, management believes
that, based upon information presently available, the amount of the allowance
for possible loan losses is adequate.
Management has not targeted any specific coverage ratio of nonperforming
loans by the allowance for loan losses and the coverage ratio may fluctuate
based on loans placed into or removed from nonperforming status.
Table 11 - Allocation of Allowance for Loan Losses
December 31,
1995 1994
Commercial, financial and agricultural..........$ 3,710 $ 4,219
Real estate - mortgage.......................... 3 39
Consumer........................................ 523 677
Leases.......................................... 600 612
Unallocated..................................... 2,944 2,093
------- -------
Total...........................................$ 7,780 $ 7,640
======= =======
Deposits
Table 12 - Average Deposit Balances and Rates Paid
The average amounts of deposits and rates paid for the years indicated,
are summarized below:
1995 1994 1993
Amount Rate Amount Rate Amount Rate
Demand deposits.....................$ 66,133 --- $ 64,446 --- $ 57,869 ---
Interest-bearing demand deposits.... 239,036 3.00% 229,693 2.34% 211,406 2.59%
Savings deposits.................... 54,982 2.42% 58,864 2.25% 45,302 2.70%
Time deposits....................... 194,512 5.44% 158,994 4.33% 163,497 4.33%
-------- ----- -------- ----- -------- -----
$554,663 3.44% $511,997 2.65% $478,074 2.88%
======== ===== ======== ===== ======== =====
Table 13 - Deposit Maturity
The maturities of time deposits of $100,000 or more are summarized below:
December 31,
1995 1994
Three months or less..........................$ 5,881 $ 6,075
Over three thru six months.................... 3,811 2,889
Over six thru twelve months................... 5,270 6,375
Over twelve months............................ 8,976 5,334
------- -------
Total.........................................$ 23,938 $ 20,673
======= =======
Capital
Stockholders' equity increased over $6.6 million or 11.6% in 1995 to
$63,909,000. Total stockholders' equity at December 31, 1994 in the amount of
$57,285,000 represents an increase of $7.8 million or 15.8% over the
$49,467,000 reported at December 31, 1993. Net earnings retained after the
payment of dividends as well as capital acquired through stock issued pursuant
to a dividend reinvestment and stock purchase plan and employee stock plan
generated the greatest portion of this growth in stockholders' equity. In
addition, stockholders' equity increased $1.2 million in 1995 due to an
increase in net unrealized gains on investment securities available-for-sale,
net of taxes. Included in dividends declared for 1995 is $1,478,000 which
represents a $.25 per share "Special Dividend" which was declared in the
second quarter of 1995. Dividends declared amounted to $5,260,000, $3,386,000
and $2,985,000 for 1995, 1994 and 1993 respectively. In 1989, federal
regulatory authorities approved risk-based capital guidelines applicable to
banks and bank holding companies in an effort to make regulatory capital more
responsive to the risk exposure related to various categories of assets and
off-balance sheet items. These guidelines require that banking organizations
meet a minimum risk-based capital, define the components of capital,
categorize assets into different risk classes and include certain off-balance
sheet items in the calculation of capital requirements. The components of
total capital are called Tier 1 and Tier 2 capital. In the case of the Bank,
Tier 1 capital is the shareholders' equity and Tier 2 capital is the allowance
for loan losses. The risk-based capital ratios are computed by dividing the
components of capital by risk-weighted assets. Risk-weighted assets are
determined by assigning various levels of risk to different categories of
assets and off-balance sheet items. Regulatory authorities have decided to
exclude the net unrealized holding gains and losses on available-for-sale
securities from the definition of common stockholders' equity for regulatory
capital purposes. However, national banks will continue to deduct unrealized
losses on equity securities in their computation of Tier 1 capital.
Therefore, national banks will continue to report the net unrealized holding
gains and losses on available-for-sale securities in the reports of condition
and income submitted to federal regulators as required by SFAS 115 and the
financial reports prepared in accordance with generally accepted accounting
principles, but will exclude these amounts from calculations of Tier 1
capital. In addition, national banks should use the amortized cost of
available-for-sale debt securities (as opposed to fair value) to determine the
average total assets as well as the risk-weighted assets used in the
calculations of the leverage and risk-based capital ratios. The ratios below
and in Table 14 reflect the above definition of common stockholders' equity
which includes common stock, capital surplus and retained earnings, less net
unrealized holding losses on available-for-sale equity securities with readily
determinable fair values. The Bank's ratios at December 31, 1995, 1994 and
1993 were above the final risk-based capital standards that require Tier 1
capital of at least 4% and total risk-based capital of 8% of risk-weighted
assets. The Tier 1 capital ratio at December 31, 1995 was 10.95% and the
total risk-based capital ratio was 12.21%, which exceeds the minimum capital
guidelines. Tier 1 capital ratio was 11.05% and the total risk-based capital
ratio was 12.30% at December 31, 1994 while Tier 1 capital ratio was 10.67%
and the total risk-based capital ratio was 11.92% at December 31, 1993.
The Bank began in mid-1994 and continued into 1995 the construction of a
new headquarters building which includes a branch banking office and
headquarters for the Corporation. The three-story building contains
approximately 53,000 square feet with approximately 10,000 square feet of this
total leased to other tenants. Land cost for the construction site was
$1,570,000. To date, the Bank has paid $5,453,002 of the projected cost of
$5,720,000. The capital expenditures relating to this building were financed
out of existing capital resources. The Bank did not and does not expect to
incur any indebtedness relating to this new facility. The reduction in
earning assets and the expenses relating to the new facilities will be offset
somewhat to the extent there will be an elimination of expenses relating to
the previous headquarters building leased by the Bank. Management does not
expect this to have a material impact on future reported results of
operations, even though this will result in the application of a material
amount of capital.
Table 14 - Capital and Performance Ratios
The following are selected ratios for the years ended December 31:
1995 1994 1993
Return on average assets...................... 1.36% 1.38% 1.41%
Return on average equity...................... 15.02% 15.47% 16.90%
Dividend payout ratio......................... 58.48% 40.91% 38.26%
Average total equity to average assets........ 9.10% 8.89% 8.31%
Total equity to assets at year end............ 8.79% 8.99% 8.41%
Primary capital ratio......................... 9.78% 10.07% 9.52%
Tier 1 risk-based capital ratio............... 10.95% 11.05% 10.67%
Total risk-based capital ratio................ 12.21% 12.30% 11.92%
Liquidity and Interest Rate Sensitivity
Liquidity is the ability to meet the requirements of customers for loans
and deposit withdrawals in the most economical manner. Some liquidity is
ensured by maintaining assets which may be immediately converted into cash at
minimal cost. Liquidity from asset categories is provided through cash,
noninterest-bearing and interest-bearing deposits with banks, federal funds
sold and marketable investment securities maturing within one year.
Securities maturing within one year amounted to $30,833,000 at December 31,
1995 compared to $24,840,000 at December 31, 1994. Interest-bearing deposits
with banks totaled $24,000 at December 31, 1995 compared to $24,000 at
December 31, 1994. Federal funds sold totaled $9,350,000 at December 31, 1995
compared to no funds sold at December 31, 1994.
The loan portfolio also provides an additional source of liquidity due to
the Bank's participating in the secondary mortgage market. Sales of
residential mortgages into the secondary market were approximately $16.1
million in 1995 and $24 million in 1994, which allowed the Bank to meet the
needs of customers for new mortgage financing. The loan portfolio also
provides significant liquidity by repayment of loans by maturity or scheduled
amortization payments.
On the liability side, liquidity is available through customer deposit
growth and short term borrowings.
Liquidity must constantly be monitored because future customer demands
for funds are uncertain. The amount of liquidity needed is determined by the
changes in levels of deposits and in the demand for loans. Management
believes that the sources of funds mentioned above provide sufficient
liquidity.
Interest sensitivity is related to liquidity because each is affected by
maturing assets and sources of funds. Interest sensitivity, however, is also
concerned with the fact that certain types of assets and liabilities may have
interest rates that are subject to change prior to maturity. Management
endeavors to manage the exposure of the net interest margin to interest-
sensitive assets and liabilities so as to minimize the impact of fluctuating
interest rates on earnings.
The Bank's asset/liability committee manages interest rate risk by
various means including "GAP" management of its asset and liability
portfolios.
The Bank has various investments structured to change investment yield
with current market conditions. Assets subject to repricing include federal
funds sold (repricing daily), loans tied to "Treasury Bill" indexes (repricing
monthly) and loans tied to "prime" or other indexes subject to immediate
change. In addition to assets currently available for repricing there are
future scheduled principal repayments on loans, loans available for repricing
at future dates and maturities of investments. These investment repayments
will have to be reinvested at current market yields.
The Bank's funding liabilities (customer deposits and borrowed funds)
repricing characteristics have become more complex, since many deposit
products that historically were fixed rate deposit products have become
deposit products subject to changing interest rates (NOW accounts and savings
accounts). Time certificates of deposit and borrowed money are subject to
interest rate change at maturity.
Interest rate sensitivity relates to changes in the interest rates earned
on bank investments (earning assets) when they reprice to current market rate
conditions as well as the interest paid on customer deposits (funding) when
they reprice to current market rates. The net result of interest rate
repricings will impact the Bank's future net interest margins (either in a
positive or negative manner) based on the amount of unmatched funding, the
amount of rate change, and the direction of rate change. The net volume of
assets and liabilities subject to rate change is measured in "gaps" where
volumes of assets do not equal liabilities within certain repricing time
periods. These gaps are illustrated in Table 15. Also included in Table 15
is a summary of the cumulative gap, as viewed by regulatory authorities, which
presents all interest bearing savings and NOW deposit balances as being
subject to immediate and full repricing.
Management considers factors in addition to volume of liability funding
(deposits) subject to rate change to more accurately reflect future impact to
the net interest margin. All interest rates do not move in full and equal
amounts for loans and deposits. Deposit rates historically lag loans in rate
movement, and rate movement occurs to a smaller degree for deposits than
loans. Modeling is used to forecast projected impact to the net interest
margin as a result of rate movements, either increasing or decreasing. For
example, prime base rate has changed 20 times since 1988 (movement from a high
of 11.5% to a low of 6.0% - a range of 5.5%). During this period, NOW account
deposit rates have also experienced rate changes (movement from a high of
4.85% to a low of 1.73% - a range of 3.12%). Historic pricing correlations
have been calculated for all interest-bearing products for rate change
repricing impact as - immediate, three month and six month time periods. As
illustrated in Table 15, management's view of interest rate sensitivity
reflects a calculated interpretation of net interest margin exposure to rate
changes. Pricing correlations are constantly refined by management. There is
no guarantee that past history will accurately reflect future changes.
Interest repricing of assets and liabilities is measured over future time
periods (interest rate sensitivity gaps). While all time gaps are measured,
management's primary focus is the cumulative gap through six months, as this
time frame directly impacts net interest income in the near term time horizon
and is most difficult to make reactive adjustment to actual rate movements.
Excluded from the interest rate sensitivity gaps are "matched" funded
fixed rate leases and associated fixed rate debt totaling $20.5 million.
During 1995, the net interest income tax-equivalent yield on average
earning assets dropped to 4.99% from 5.30 % in 1994 and 5.30% in 1993. Prime
rate in 1995 started at 8.5%, moving up to 9% in February, down to 8.75% in
July and finally dropping to 8.50% in December. The average tax-equivalent
yield on earning assets increased in 1995 to 8.59%, up from 8.07% in 1994.
Average earning assets increased by $49,000,000 to $587,098,000 in 1995.
Deposit funding (average balances) increased nearly $42,700,000 in 1995.
Total deposit cost increased to 3.44% from 2.65% in 1994. This cost increase
resulted from increased competition locally for certificates of deposit during
the first quarter of 1995. Certificate of deposit growth for 1995 was nearly
$35,600,000, with an average cost in 1995 of 5.44% compared to 4.33% in 1994.
Borrowings also increased by $7,000,000 with an average cost of 7.07% compared
to 6.06% in 1994.
Table 15 - Interest Rate Sensitivity Gaps
0-30 31-90 91-180 181-365 Over
Interest Earning Assets (I.E.A.) Days Days Days Days 1 year
Fed Funds sold......................$ 9,350 $ 0 $ 0 $ 0 $ 0
Investment securities................ 2,605 6,535 6,315 14,299 161,137
Loans - Maturities................... 6,070 15,448 23,449 38,026 344,280
Loans - Variable Rate................ 116,251 533 2,655 5,044 0
--------- -------- -------- -------- --------
Total...............................$ 134,276 $ 22,516 $ 32,419 $ 57,369 $ 505,417
Cumulative..........................$ 134,276 $ 156,792 $ 189,211 $ 246,580 $ 751,997
Interest Bearing Liabilities (I.B.L.)
C/D's $100,000 and over.............$ 2,621 $ 3,560 $ 2,969 $ 2,411 $ 3,647
Certificates of Deposit - Maturities. 10,426 20,053 30,868 33,835 103,318
Interest Deposits - Variable Rate.... 96,294 31,406 16,776 17,644 156,959
Short-term borrowings................ 2,234 0 0 621 0
-------- -------- ------- -------- --------
Total...............................$ 111,575 $ 55,019 $ 50,613 $ 54,511 $ 263,924
Cumulative..........................$ 111,575 $ 166,594 $ 217,207 $ 271,718 $ 535,642
Period GAP (Dollars)................$ 22,701 $ (32,503) $ (18,194) $ 2,858 $ 241,493
I.E.A./I.B.L.%....................... 120% 41% 64% 105% 192%
Cumulative GAP (Dollars)............$ 22,701 $ (9,802) $ (27,996) $ (25,138) $ 216,355
Cumulative I.E.A./I.B.L.%............ 120% 94% 87% 91% 140%
Regulatory Presentation
Assets (cumulative).................$ 134,276 $ 156,792 $ 189,211 $ 246,580 $ 751,997
Funding (cumulative)................$ 334,360 $ 357,973 $ 391,810 $ 428,056 $ 535,021
-------- -------- -------- -------- --------
Cumulative GAP (Dollars)............$(200,084) $(201,181) $(202,599) $(181,476) $ 216,976
Cumulative I.E.A./I.B.L.%............ 40% 44% 48% 58% 141%
New Financial Accounting Standards
The Financial Accounting Standard Board ("FASB") issued its Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
in March 1995. This statement applies to long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and to long-lived assets and certain identifiable intangibles to be
disposed of. The statement applies to all entities. This statement does not
apply to financial instruments, long-term customer relationships of a
financial institution, mortgage and other servicing rights, deferred policy
acquisitions costs, or deferred tax assets. This statement shall be effective
for financial statements for fiscal years beginning after December 15, 1995.
The impact that adoption of FASB Statement No. 121 will have on the financial
statements is currently under review, but is not expected to have a material
effect on the financial statements of the Corporation.
FASB Statement No. 122, "Accounting for Mortgage Servicing Rights - an
amendment of FASB Statement No. 65", effective for fiscal years beginning
after December 15, 1995, establishes accounting standards for recognizing
servicing rights on mortgage loans. The Corporation has historically
originated mortgage loans as a normal business activity, selling the mortgages
on the secondary market to Federal Home Loan Mortgage Corporation and
retaining all mortgage servicing. Mortgage sale income has been recorded on a
"net" gain/loss basis. FASB No. 122 will require recognition of servicing
"value" as an asset and immediate income as though mortgage servicing has been
sold rather than retained. The servicing asset valuation will be amortized
over the expected servicing life of the mortgage portfolio. In addition, the
mortgage servicing asset must be valued periodically for impairment, based
upon review of expected servicing life in relation to current market rates.
The implementation of FASB No. 122 will result in a greater recognition of
income from mortgage origination and sales activity and a corresponding
decrease of servicing income over the serviced mortgage portfolio life.
FASB Statement No. 123, "Accounting for Stock-Based Compensation", was
issued in October 1995. This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. An employee
stock purchase plan that allows employees to purchase stock at a discount from
market price is not compensatory if it satisfies three conditions: (a) the
discount is relatively small, (b) substantially all full-time employees may
participate on an equitable basis, and (c) the plan incorporates no option
features such as allowing the employee to purchase the stock at a fixed
discount from the lesser of the market price at grant date or date of
purchase. The disclosure requirements of this statement are effective for
financial statements for fiscal years beginning after December 15, 1995, or
for an earlier fiscal year for which this statement is initially adopted for
recognizing compensation cost. The Corporation has determined that the
application of this standard will not have a material effect on earnings.
Item 8 - Financial Statements and Supplementary Data
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the following
pages: Page
Report of Independent Auditors 26
Consolidated Balance Sheets 27
Consolidated Statements of Income 28
Consolidated Statements of Changes in Stockholders' Equity 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial Statements 31
(b) The following supplementary data is set forth in this Annual Report
on Form 10-K on the following pages:
Summary of Quarterly Financial Data (Unaudited) 49
Trout, Ebersole & Groff, LLP
Certified Public Accountants
1705 Oregon Pike
Lancaster, Pennsylvania 17601
(717)569-2900
FAX (717) 569-0141
Independent Auditors' Report
Board of Directors and Shareholders
Sterling Financial Corporation and Subsidiaries
Lancaster, Pennsylvania
We have audited the accompanying consolidated balance sheets of Sterling
Financial Corporation and Subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sterling Financial Corporation and Subsidiaries at December 31, 1995 and 1994
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 2, the Corporation changed its method of accounting
for investments to adopt the provisions of the Financial Accounting Standards
Board's SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" at January 1, 1994.
Trout, Ebersole & Groff, LLP
Trout, Ebersole & Groff, LLP
Certified Public Accountants
January 19, 1996
Lancaster, Pennsylvania
Consolidated Balance Sheets
Sterling Financial Corporation and Subsidiaries
As of December 31,
(Dollars in thousands) 1995 1994
Assets
Cash and due from banks...........................................$ 35,414 $ 32,374
Interest-bearing deposits in other banks.......................... 24 24
Federal funds sold................................................ 9,350 none
Mortgage loans held for sale...................................... 962 524
Investment Securities: (Note 4)
Securities held-to-maturity
(market value - $124,066 - 1995 and $156,047 - 1994)........... 122,885 161,160
Securities available-for-sale.................................... 68,967 9,051
Loans (Note 5).................................................... 427,674 393,657
Less: Unearned income........................................... (1,362) (1,008)
Allowance for loan losses (Note 6)......................... (7,780) (7,640)
-------- -------
Loans, net........................................................ 418,532 385,009
-------- -------
Premises and equipment (Note 7)................................... 16,450 11,977
Other real estate owned........................................... 252 759
Accrued interest receivable and prepaid expenses.................. 11,779 8,954
Other assets (Note 8)............................................. 26,539 23,563
-------- -------
Total Assets..................................................... $711,154 $633,395
======== ========
Liabilities
Deposits:
Noninterest-bearing.............................................$ 77,318 $ 73,459
Interest-bearing (Note 9)....................................... 532,787 463,543
-------- --------
Total Deposits.................................................... 610,105 537,002
-------- --------
Federal funds purchased (Note 10)................................. none 6,000
Interest-bearing demand notes issued to U.S. Treasury (Note 10)... 2,234 2,914
Other liabilities for borrowed money (Note 10).................... 21,523 19,173
Accrued interest payable and accrued expenses..................... 8,231 5,737
Other liabilities................................................. 5,152 5,284
-------- --------
Total Liabilities................................................. 647,245 576,110
Stockholders' Equity -------- --------
Common Stock -(par value:$5.00)
No. shares authorized: 1995 and 1994 - 10,000,000
No. shares issued: 1995 - 5,932,686; 1994 - 5,874,417
No. shares outstanding: 1995 - 5,925,527; 1994 - 5,868,610...... 29,663 29,372
Capital surplus................................................... 9,987 8,544
Retained earnings................................................. 22,848 19,114
Net unrealized gain on securities available-for-sale, net of taxes 1,624 420
Less: Treasury Stock (7,159 shares in 1995 and
5,807 shares in 1994) - at cost........................... (213) (165)
-------- --------
Total Stockholders' Equity........................................ 63,909 57,285
-------- --------
Total Liabilities and Stockholders' Equity........................$711,154 $633,395
======== ========
See accompanying notes to financial statements
Consolidated Statements of Income
Sterling Financial Corporation and Subsidiaries
For the years ended December 31,
(Dollars in thousands, except per share data) 1995 1994 1993
Interest Income
Interest and fees on loans...........................$ 37,975 $ 32,356 $ 31,167
Interest on deposits in other banks.................. 2 2 27
Interest on federal funds sold....................... 449 264 191
Interest and dividends on investment securities:
Taxable............................................ 7,526 6,636 6,242
Tax-exempt......................................... 2,695 2,496 2,270
Dividends on stock................................. 203 177 195
--------- --------- ---------
Total Interest Income................................ 48,850 41,931 40,092
--------- --------- ---------
Interest Expense
Interest on time certificates of deposit of
$100,000 or more................................... 893 613 488
Interest on all other deposits....................... 18,200 12,970 13,303
Interest on demand notes issued to the U.S. Treasury. 114 77 62
Interest on federal funds purchased.................. 66 10 none
Interest on other borrowed money..................... 1,880 1,255 1,183
Interest on mortgage indebtedness and obligations
under capitalized leases........................... none 1 6
--------- --------- ---------
Total Interest Expense............................... 21,153 14,926 15,042
--------- --------- ---------
Net Interest Income.................................. 27,697 27,005 25,050
Provision for loan losses (Note 6)................... 534 1,081 2,430
--------- --------- ---------
Net Interest Income after Provision for Loan Losses.. 27,163 25,924 22,620
--------- --------- ---------
Other Operating Income
Income from fiduciary activities..................... 856 742 639
Service charges on deposit accounts.................. 2,010 1,798 1,891
Other service charges, commissions and fees.......... 1,716 1,539 1,577
Mortgage banking..................................... 525 635 2,435
Other operating income (Note 8)...................... 3,186 2,329 2,429
Investment securities gains or (losses).............. none none 8
--------- --------- ---------
Total Other Operating Income......................... 8,293 7,043 8,979
--------- --------- ---------
Other Operating Expenses
Salaries and employee benefits (Note 11)............. 13,040 12,264 11,566
Net occupancy expense................................ 1,721 1,477 1,355
Furniture and equipment expense (including depreciation
of $917 in 1995, $779 in 1994 and $753 in 1993).... 1,605 1,379 1,253
FDIC insurance assessment............................ 622 1,128 1,052
Other operating expenses............................. 6,435 5,805 5,822
--------- --------- ---------
Total Other Operating Expenses....................... 23,423 22,053 21,048
--------- --------- ---------
Income Before Income Taxes........................... 12,033 10,914 10,551
Applicable income taxes (Note 12).................... 3,039 2,637 2,749
--------- --------- ---------
Net Income...........................................$ 8,994 $ 8,277 $ 7,802
========= ========= =========
Earnings per common share:
Net Income.........................................$ 1.52 $ 1.42 $ 1.36
Cash dividends declared per common share.............$ .89 $ .58 $ .54
Average shares outstanding...........................5,909,641 5,837,103 5,728,400
See accompanying notes to financial statements
Consolidated Statements of Changes in Stockholders' Equity
Sterling Financial Corporation and Subsidiaries
Net
Unrealized
Gain on
Available-
Shares for-Sale
Common Common Capital Retained Securities, Treasury
Stock Stock Surplus Earnings Net of Taxes Stock Total
(Dollars in thousands)
Balance, January 1, 1993..... 2,702,627 $ 13,513 $ 14,100 $ 15,414 $ 0 $ (233)$ 42,794
Net income.................... 7,802 7,802
Common stock issued
Dividend Reinvestment Plan... 34,951 174 1,159 1,333
Employee Stock Plan.......... 8,760 44 252 296
Stock Dividend issued -
Common stock - 5% including
cash paid in lieu of
fractional shares........... 136,582 683 5,293 (6,008) (32)
Cash dividends declared -
Common stock................. (2,985) (2,985)
Purchase of Treasury Stock
(7,270 shares)............... (267) (267)
Issuance of Treasury Stock for
Dividend Reinvestment Plan
(15,056 shares).............. 26 500 526
---------- -------- -------- -------- ---------- ------- --------
Balance, December 31, 1993.... 2,882,920 14,414 20,830 14,223 0 0 49,467
Net income.................... 8,277 8,277
Common stock issued
Dividend Reinvestment Plan... 55,255 277 2,005 2,282
Employee Stock Plan.......... 8,830 44 319 363
Two-for-one stock split....... 2,927,412 14,637 (14,637)
Cash dividends declared -
Common stock................. (3,386) (3,386)
Purchase of Treasury Stock
(14,471 shares).............. (379) (379)
Issuance of Treasury Stock for
Dividend Reinvestment Plan
(8,664 shares)............... 27 214 241
Net unrealized gain on
available-for-sale securities,
net of taxes................ 420 420
--------- -------- -------- -------- ---------- ------- --------
Balance, December 31, 1994....5,874,417 29,372 8,544 19,114 420 (165) 57,285
Net income.................... 8,994 8,994
Common stock issued
Dividend Reinvestment Plan... 45,121 225 1,115 1,340
Employee Stock Plan.......... 13,148 66 325 391
Cash dividends declared -
Common stock................. (5,260) (5,260)
Purchase of Treasury Stock
(41,880 shares).............. (1,252) (1,252)
Issuance of Treasury Stock for
Dividend Reinvestment Plan
(40,528 shares).............. 3 1,204 1,207
Change in net unrealized gain
on available-for-sale
securities, net of taxes...... 1,204 1,204
--------- -------- -------- -------- ---------- ------- --------
Balance, December 31, 1995....5,932,686 $ 29,663 $ 9,987 $ 22,848 $ 1,624 $ (213) $ 63,909
========= ======== ======== ======== ========== ======= ========
See accompanying notes to financial statements
Consolidated Statements of Cash Flows
Sterling Financial Corporation and Subsidiaries
For the years ended December 31,
(Dollars in thousands) 1995 1994 1993
Cash Flows from Operating Activities
Net Income...........................................$ 8,994 $ 8,277 $ 7,802
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation...................................... 1,198 1,014 983
Accretion & amortization of investment securities. 367 661 550
Provision for possible loan losses................ 534 1,081 2,430
Provision for deferred income taxes............... 579 307 (299)
(Gain) loss on sale of property and equipment..... (1) (2) none
(Gain) loss on maturities/sales of
investment securities............................ none none (8)
(Gain) on sale of mortgage loans.................. (163) (279) (2,139)
Proceeds from sales of mortgage loans............. 16,283 24,284 74,136
Originations of mortgage loans held for sale...... (16,558) (21,098) (75,428)
Change in operating assets and liabilities:
(Increase) in accrued interest receivable
and prepaid expenses............................ (2,825) (138) (705)
(Increase) in other assets....................... (2,469) (3,341) (1,235)
Increase (decrease) in accrued interest payable
and accrued expenses........................... 1,915 324 227
Increase (decrease) in other liabilities........ (753) (140) (98)
--------- --------- ---------
Net cash provided by/(used in) operating activities.. 7,101 10,950 6,216
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits
in other banks..................................... 1,052 45,226 3,678
Purchase of interest-bearing deposits in other banks. (1,052) (45,209) (2,818)
Proceeds from maturities of investment securities.... 33,016 32,538 36,367
Purchase of investment securities.................... (53,199) (56,310) (54,871)
Federal funds sold, net.............................. (9,350) 12,350 (9,150)
Net loans and leases made to customers............... (34,057) (33,904) (11,486)
Purchases of premises and equipment.................. (5,681) (5,810) (827)
Proceeds from sale of premises and equipment......... 11 245 12
--------- --------- ---------
Net cash provided by/(used in) investing activities.. (69,260) (50,874) (39,095)
Cash Flows from Financing Activities
Net increase in demand deposits, NOW and
savings accounts................................... 32,041 7,013 43,978
Net increase (decrease) in time deposits............. 41,062 24,309 (11,482)
Net (decrease) in interest-bearing demand notes
issued to the U.S. Treasury........................ (680) (86) none
Proceeds from borrowings............................. 39,180 13,850 14,016
Repayments of borrowings............................. (36,830) (14,088) (9,329)
Federal funds purchased, net......................... (6,000) 6,000 none
Repayments of mortgages payable and capitalized
lease liability.................................... none (11) (207)
Proceeds from issuance of common stock............... 1,731 2,645 1,629
Cash dividends paid.................................. (5,260) (3,386) (2,985)
Cash paid in lieu of fractional shares............... none none (32)
Acquisition of treasury stock........................ (1,252) (379) (267)
Proceeds from issuance of treasury stock............. 1,207 241 526
--------- --------- ---------
Net cash provided by/(used in) financing activities.. 65,199 36,108 35,847
--------- --------- ---------
Increase (decrease) in cash and due from banks....... 3,040 (3,816) 2,968
Cash and due from banks:
Beginning............................................ 32,374 36,190 33,222
--------- --------- ---------
Ending...............................................$ 35,414 $ 32,374 $ 36,190
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money..$ 19,937 $ 14,728 $ 15,383
Income taxes....................................... 2,526 2,160 3,110
Supplemental Schedule of Noncash Investing and
Financing Activities:
Other real estate acquired in settlement of loans....$ 293 $ 638 $ 121
See accompanying notes to financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sterling Financial Corporation and Subsidiaries
(All dollar amounts presented in the tables are in thousands,
except per share data)
Note 1 - Formation of Sterling Financial Corporation
As a result of a plan of reorganization, The First National Bank of
Lancaster County, now by name change, Bank of Lancaster County, N.A. (Bank),
became the wholly owned subsidiary of Sterling Financial Corporation (Parent
Company), a new bank holding company, at the close of business June 30, 1987.
Each outstanding share of the Bank's common stock (par value $10.00) was
converted into two shares of common stock (par value $5.00)
Parent Company. The authorized capital of the Parent Company is
10,000,000 shares of common stock.
Note 2 - Summary of Significant Accounting Policies
The accounting and reporting policies of Sterling Financial Corporation
and its subsidiaries (the Corporation) conform to generally accepted
accounting principles and to general practices within the banking industry.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and
revenues and expenses for the period. Actual results could differ
significantly from these estimates. The following is a summary of the
most significant policies.
Principles of